Published 4:00 am, Wednesday, December 29, 1999

It isn't easy to lose money in the current bull market. But the $3 billion Vanguard Equity Income Fund is down about 1.4 percent this year, and Vanguard Group has decided to make some changes in the fund's management.

The No. 2 U.S. mutual fund company said yesterday that it is replacing San Francisco's Spare, Kaplan, Bischel & Associates with Boston's Wellington Management Co. on the team of three "advisory firms" that oversees the equity income fund's assets.

The change will take effect on New Year's Day.

Spare, Kaplan, which has helped manage the Vanguard fund since 1995, was responsible for $481 million, or 16 percent, of the fund's total assets.

"Spare, Kaplan has served the fund's shareholders capably," Vanguard Chairman John Brennan said in a statement. "Looking forward, however, we believe that allocating their share of the fund's portfolio to Wellington Management Co. will provide a better mix of investment disciplines for the fund's overall portfolio."

John Woerth, a Vanguard spokesman, said separately that Spare, Kaplan is not being punished for the equity income fund's relatively lackluster performance.

"To portray this as a performance issue is just plain wrong," he said. "The fund has performed well. The board is simply looking for a new blend of talents for the advisory firms."

Woerth said Vanguard's board of directors decided to make the change earlier this month.

Andrew Bischel, Spare, Kaplan's president and director of investments, said his company had enjoyed an "excellent" relationship with Vanguard prior to the board's decision.

"We have very high regard for Vanguard," he said. "They made their decision, and we're disappointed by it, but these things happen."

Bischel declined to comment on the impact that losing Vanguard as a client will have on his 20-employee firm.

The Vanguard Equity Income Fund is designed to meet the needs of more conservative investors. Only about 1 percent of its portfolio is invested in technology stocks, which have set the pace for Wall

Street's growth this year.

The bulk of the fund's assets are invested in utilities, financial-service firms and health care enterprises, which tend to pay higher dividends but do not hold the same promise of stratospheric gains as more tech-oriented concerns.

For this reason, the equity income fund has failed to keep pace with the Standard & Poor's 500 index for the past five years. The fund has lost 1.4 percent to date this year, compared with an approximately 20 percent gain for the S&P 500.

Moreover, according to data compiled by Bloomberg News, the Vanguard fund has performed well below other funds in the equity income category. The typical such fund has gained more than 8 percent this year.

Since it opened in 1988, annual returns for the Vanguard fund have ranged from a loss of almost 12 percent in 1990 to a 37 percent advance in 1995. The fund has registered gains in all but three years.

"The (Vanguard) fund may not be having a great year, but over time, this fund has performed just fine for its investors," said Jeff Molitor, Vanguard's director of portfolio review.

Even so, he said Spare, Kaplan was not seen as bringing the right mix to the fund's investments. Wellington, on the other hand, was viewed as a better fit with the fund's other managers.

"In looking at equity income, one of the elements that we found attractive in terms of Wellington was that the portfolio would be more diversified," Molitor said.

He said Vanguard had not communicated its concerns about diversification prior to informing Spare, Kaplan that its services no longer would be needed.

"We don't tell managers how to exercise their craft," Molitor said. "We want managers to have their own style and strategy."

Still, he said Spare, Kaplan's five- year tenure co-managing the equity income fund was unusually brief for Vanguard. The typical manager, he said, remains with a fund for 10 years or more.

Vanguard has had a long, cozy relationship with Wellington, which is Vanguard's largest external adviser, managing some $84 billion in 14 separate funds.